It is strategic planning season at many pharma companies. Even more than most years, planning strategies against a robust set of macro-scenarios will be crucial to mid- and long-term success. While historically these scenarios have revolved around targeted issues like assessing the promise of a new modality, the potential of serving an unmet need, or whether to increase the dividend, the current challenges facing the biopharma industry call for a more expansive – and likely more difficult – set of questions to be asked: where is the biopharma macro environment going? Lacking a crystal ball into the future, it is still possible to outline potential scenarios, each with different implications for strategy (exhibit below).
Based on precedent, scenarios A and B (temporary and prolonged downturn) seem the most likely and are certainly top of mind for decision makers. They lead to different strategies to maximize shareholder return: Scenario (A) (temporary downturn) is most similar to where biopharma has been for the last 15 years with its focus on growth; successful strategies bank on innovation and deep pockets taking advantage of a “bottom of the cycle” moment to hunt for under-priced opportunities. Scenario (B) (prolonged downturn) is perhaps most like the great financial crisis of 2008 – 11, and assumes that the bottom is not in and that the market will heavily discount the future for a while yet which puts a premium on present financial performance, namely EPS. In a prolonged downturn scenario (B), companies that have grown heavy on the revenues of their blockbusters will be rewarded if they invest to reengineer themselves into leaner, more efficient organizations. Most notably, driving enhanced productivity and cost performance from operational leverage from AI seems a ripe opportunity (at least relative to less mature scientific AI applications).
What has changed over the past few years – with recent events emphasizing its salience – is the probability of Scenario C: a sustained downturn of the US drug market due to new price-controls, reimbursement limitations, or regulatory changes. Given recent developments, the likelihood of Scenario C is no longer small enough that it can be ignored. The potential consequences could be that – without meaningful industry transformation – a substantial share of the drug R&D pipeline becomes economically non-viable (as anyone who has ever done an NPV calculation on a drug program knows, the US market is pivotal in determining the sign of the answer), while the existing commercial portfolio underperforms, and future new science to leverage is constrained or postponed by decreased US investment in basic research.
Deliberate planning for the full range of scenarios will enable organizations to tack towards better outcomes. Pharma leaders, and especially the strategists, should be thinking through what are leading indicators to assess which scenario is emerging, what is the right corporate response to each, which moves are no-regret in any scenario and which need to be ready at various trigger points, and how to best communicate these strategies to investors. In particular, if the classical drug business trends to delivering lower long-term returns (Scenario C) this raises questions of how one might reinvent the pharmaceutical approach (e.g., with new scientific paradigms, with new priorities) or where in addition to prescription drugs might Pharma organizations have a right to win? As Fermat wrote four centuries ago, the answer will not fit in the margin… Luckily, we believe there are many such opportunities ranging from applications of AI to considering expanding the focus beyond just the drug, to med-tech to diagnostics and possibly further afield within the health sphere. But the time to think about the contingencies of scenarios A, B, and C is now.